Financial markets

Business regulation

Beasts of burden?

ONE theme that is often heard from the business community in recent years is the extra burden of regulation; some blame it for the lack of investment. Regulation is a tough issue to quantify; for some businesses, it is the arbitrary nature of changes in the regime that is the problem. It is hard to plan when you don't know the rules. For big groups, regulations may sometimes be a boon, because they make it more difficult for new companies to enter the market.

The World Economic Forum produces a global competitiveness report every year, talking to 13,000 business leaders in 148 economies in the latest version. Among the many questions it asks is whether regulations are burdensome in each economy; on this issue, Singapore has ranked top (i.e. least burdensome) every year since 2006-07.

Broadly speaking, one has the impression that emerging markets have been reducing their regulations and developed markets have been increasing them. A simple way to test the proposition is to compare the rankings of countries between the 2006-2007 and 2013-2014 surveys. First the countries with the biggest ranking gain (those where perception of the regulatory burden has improved).

1. Mauritius

2= Lesotho/Albania

4 Guyana

5 Bosnia

6 Ecuador

7= Montenegro/Camerron

9 Panama

10 Paraguay

The developing world features strongly; no doubt because many were seen as tied up in red tape seven years ago. Now the countries with the biggest ranking fall (those where the burden is perceived to have increased).

1 Portugal

2 Mauritania

3 Denmark

4 Slovakia

5= Spain/Israel

7 Romania

8= Australia/Thailand

10 Hungary

There are European countries in both lists but more in the bottom ten; the ex-Communist countries seem to be moving in both directions. Portugal has slipped a remarkable 93 places in seven years.

American readers may like to know that, on this measure, the country has slipped from 23rd to 80th over seven years; not quite in the bottom 10 (i.e. the fastest fallers) but not far off. In absolute terms, some core EU countries are seen as carrying the heaviest burdens; Spain is ranked 125th in the latest survey, France 130th, Portugal 132nd, Greece 144th and Italy 146th. Given that all these countries are desperate for growth, the remedy seems obvious.

British businesses have long been burdened with excessive regulation. Since 1842, it has been illegal to employ women or boys aged under 10 in coal mines. The result of this meddlesome legislation has been (as its opponents predicted) the demise of the British coal industry.

You phrase the report as though it's about regulation when it isn't. If you go through the data listings, they have 12 "Pillars", some with multiple parts. The lesson of the report may be more like Pillar 4: reduce the effect of malaria and TB on your economy.

If you take the actual rankings of global competitiveness, the US is #5 behind Switzerland, Singapore, Finland and Germany. Only one of those is low regulatory.

If you want to raise your global competitiveness, the lessons of the report are pretty clearly things like: protect property rights but not too much, make it easy to start a business, have credit available in local markets, have local competition, etc.

Speaking of this report as "regulation" = competitiveness is not only misleading but it conflates regulation for stuff like healthcare - which every developed country but the US has required - with getting approval from the government to buy or dispose of equipment or to fire a worker.

And it distorts how regulation matters. Germany has complex environmental regulation. But in an economy that seeks to add value through engineering and craft - both at the large and small scale - they are able to incorporate those regulations as a way to drive efficiencies. Another country, like say S. Korea, might choke on those requirements.

Indeed - good regulatory design (minimal, efficient, modern and targeted in attaining well defined objectives) is precisely what's required.

For purposes of minimizing tax avoidance/ laundering/ etc, we need to require that all banks have verification of account holder identities. That's what should be mandated then - there's no reason to prohibit outsourcing of this to third parties such as the Post Office (indeed, this should be actively encouraged/ facilitated).

Lowering the barriers to market entry, and allowing smaller banks to compete with larger banks, is something we should desire irrespective of whether we allow cross border banking. These are separate issues. Online banking is worthwhile of its own merits, and there's no sound basis for having regulation which arbitrarily obstructs this.

Likewise, regulation on id verification is very much distinct from the regulation needed for dealing with deposit risk. True: banks, with the privilege of creating officially guaranteed money (most money is just deposits - an item on bank balance sheets), require strict control of their balance sheets - they need sufficient equity cover against their liabilities, and they need sufficient control on the risk of their assets. That much should be obvious. Now, it ought to be done with the leanest, most efficient and most transparent mechanisms we can devise.

Since these are very different regulatory objectives from those for tax avoidance or money laundering, and since the mechanisms involved will be so different, it is better to keep these regulatory interventions distinct and independent (discrete modularity of regulatory interventions for clarity, ease of compliance and ease of legislative maintenance).

But what of banking regulations which require a bank to verify the identity and home address of every new customer? And which require them to do so directly (they can't outsource this to the Post Office network)?

This essentially prevents new online banks from becoming established in the UK - law essentially requires a branch network, even if a large share of consumers would prefer to handle all their banking online.

Well designed, minimal, objective-driven regulation is a very good thing. For example, we do need frameworks to deal with tax avoidance, control of dangerous chemicals, workplace safety, etc; but we need to ensure that these are well designed and do not impose unnecessary costs or barriers to innovation.

The west has been ramping regulations to try and deal with the serial bubbles banks are printing. It would be better to just stop printing bubbles. Printing capital misallocation is the route to future banana republic type economies.

Interesting stuff. The US is ranked 5th in competitiveness overall, while two culturally-similar countries (honest) with a higher quality of life, Canada and Australia, are ranked 14th and 21st respectively.
.http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf
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Which implies that being competitive and living well aren't necessarily one and the same...

I outlined precisely where regulation (requiring banks to verify id directly in-branch) is costing many hundreds of billions of euro in economic damage.

The objective is to minimize tax avoidance (and perhaps you insist on others around black market activity). Fine then - that should be the focus. Why not allow third parties (such as the post office network, or local government) to verify an individual's identity (at a price)? How is that any less secure than having a branch in every small town for handling identities in-house?

The difference:
- status quo does not scale, and requires a bank to have tens of billions of euro if it wants a geographically distributed (reduced risk) customer and client base
- where third parties can handle id verification, there can be an arbitrary number of banks, competing not only nationally but potentially across the whole of Europe (branch networks cease to be an arbitrary restriction of competitive ability). Think: with more players in the market, that might help you get a higher interest rate on your savings, or a lower interest rate on your mortgage (massive banks might just have to cut costs to compete - say, less marble, less wood panelling and fewer 6-figure salaries?).

So, my native country (Brazil) is now #56 which means that we are down 8 positions. Some problems are obvious:

1. Infrastructure: one of the worst in this planet 114/148). If you have ever been to Brazil, you'll notice that our airports, roads and ports are terrible. It's a major bottleneck we have, and the naive thought that the upcoming World Cup would force investments in infrastructure which are not happening.

2. Failed institutions: despite its enormous size, the State is not able to provide the very basic: education, healthcare and so on. Brazil needs to cut the size of the state badly, but I don't see that happening, unfortunately.

3. Goods market efficiency: it shows how difficult it is to open and run a business in Brazil, too much bureaucracy, excessive protectionism (148 out of 148 in terms of Imports as a percentage of GDP). You have to be a little crazy to think about opening a business in Brazil.

But the worst is that we will never see a Brazilian willing to discuss those problems. Whenever a report like this one is released, they always say that "they are unfair", "they are against Brazil" and some other b.s.

While I agree, not much of that really changed. If anything, regulation now goes as far down as the font size required for online disclosures, while not taking into account the core issue of TBTF.

That, and the insane web of regulations raises the cost of starting any new financial institution/non-bank FI so much, it stifles competition considerably.

Smart macro-regulation is what is needed - capital controls, Glass-Steagall, getting off the teat of QE, etc. Instead we've gone so ridiculously micro that only the big banks can keep up, doubling down on our existing framework.

I think there was too much lobbying of Congress for Obama to do much, along with the hurried nature of the thing. Having Chris Dodd leading the legislation was a big part of the problem, he was, and is, very much in the pocket of business (and is now a lobbyist for the MPAA).

Maybe, but I was pretty frustrated that the Obama administration did not review existing regulations overall as part of the post-crisis recovery. I suspect the number of extra jobs we could be ahead isn't small and I likewise suspect, the government could have more control over the matters it tries to correct with regulations.

But now banks like TD Bank, Bank of America and Wells Fargo are loosening the purse strings, offering loans with down payments that are as low as 5%.

TD Bank's "Right Step" mortgage, for example, allows borrowers to secure a loan with a 5% down payment. It also allows them to receive as much as 2% of the sale price as a gift from a relative or other third party, so they would really only need 3% down.

"87% of small business owners are looking for more certainty compared to 5% looking for assistance. "
"84% say that regulations, restrictions, and taxes negatively impact their ability to do business. "

Unlike what some keynesians believe, demand is not the main problem currently. It probably was back in 2009. Things have changed.

Which is the problem, right? Good regulation sets up boundaries while bad regulation puts up barriers to main progress and a good proxy for goodness of regulation is the converse of specificity. Highly engineered regulations don't end up saying what can and can't be done, they end up determining how many lawyers you need before you can do anything and everything.

One of the failures of the president and his party was their inability or unwillingness to recognize that regulations play as much of a role in competitiveness and economic growth as taxation or fiscal policy.

"The Board's regulation and guidelines do not apply to the activities of bank holding companies and their nonbank subsidiaries. The Board, however, expects bank holding companies and their nonbank subsidiaries to conduct any real estate lending activities in a prudent manner consistent with safe and sound lending standards."

Proposal:
Maximum LTV - loan to value - for home equity was 80%-95%
(**) Any portion of a loan exceeding 85 percent LTV must be covered by private mortgage insurance.

Final:
** A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied, 1- to 4-family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.